The 36-year-old hurler, who is on the second year of a two-year contract with the Red Sox, announced his decision at press conference at the team's spring training complex in Fort Myers, Fla.
The two-time all-star, coming off a World Series championship with Boston, was set to make $13.25 million this season, but will forfeit that compensation and will likely be placed on the restricted list.
He didn't rule out a return to baseball later on.
"I've never had to work a day in my life," Dempster said. "It's meant the world to me. I'm so thrilled and humbled by everything the game has given me. I'm extremely grateful. It took me a long time to come to this decision. I wanted to be 100 percent behind it and I am."
Dempster posted an 8-9 record with a 4.57 ERA in 32 games (29 starts) last season. He was in the starting rotation during most of the season until being demoted to the bullpen in October.
Over his 16-year career, Dempster has compiled a 132-133 record with 87 saves and a 4.35 ERA over 579 games for Florida, Cincinnati, the Chicago Cubs, Texas and the Red Sox.